The lessons learned from recent construction payment disputes

top ERP headachesPayment disputes are considered to be the single biggest threat to construction firms in the UK, according to a recent survey by BACS Payment Services.

Eque2, leading provider to the construction and software industry, believe that using specialist construction software will provide you with the tools to run and manage your business effectively and efficiently, helping you to increase margins, manage projects and save time and money. Here’s a glimpse of what you need to know to avoid payment disputes.

More than 75% of UK businesses find they are waiting more than the agreed terms before being paid. Late payment was also reported by over 70% of construction firms in a report by Bibby Financial Services and The Vinden Partnership.

There are 280,000 construction businesses in the UK employing an estimated 2.9 million people. The average amount of construction payment scrapped by these firms over a three-year period is £30,465. This means £1.9 billion is being written off across the sector every year.

Government efforts have largely centered on the provision of a new charter which, it is felt, has failed to address the issue. Less than a third of the Construction Leadership Council’s members signed up to the Construction Supply Chain Payment Charter. Proposed revisions have received little support. New Government proposals are shifting the focus to trade bodies challenging unfair payment terms in court.

But disputes are thought to be increasingly being settled out of court to avoid additional costs. Cases peaked in 2013 at a total value of £17.8 million. As this report on the adjudication process shows, the costs are not inconsiderable and can be harder to recover. Proceedings can also be lengthy. The average time it takes to resolve a dispute has risen from 7.9 to 10 months, but the UK has a shorter resolution time than the global average of 13.2 months.

Late payment can lead to insolvency and a domino effect along the supply chain. Managing supply chain relationships can be hard, especially when you have to factor in fluctuating costs. Wes Simmons, Managing Director of Eque2, says: “The number of issues having an impact on construction costs is on the increase, it’s important to have a system in place in order to control costs more effectively.”

It should all start at the signing of contracts. Without provision for late construction payment and clear terms on when payments should be made, both suppliers and purchasers risk disputes later on. In addition, firms should pay close attention to invoicing and construction payment systems.

Peter Heatley, Managing Director of Melbury Consultants, cites two cases which have led to protracted disputes: On a £2.5m house building project the parties couldn’t agree either the settlement of the final sum or the level of finishes that should have been provided. A contract would have addressed these issues – but no contract existed.
At the end of a £4.5m project for the refurbishment of a hotel and restaurant the builder and owner couldn’t agree on anything and, again, had no written contract in place.

He said: “Once a construction project starts it leaves little time for proper consideration of potential problems and the identification of solutions. The answer to all of this is setting the contract up correctly in the first place.

“It should allocate the risks between the parties, identify the scope of works and quality standards that are to be achieved. The timeframe in which the works are to be completed should be agreed, and the contract should also cover guarantees, warranties and the implications for there being over-runs.”

Once signed, make sure the terms of the contract are put into play throughout a project. In addition, follow these tips to protect your business from disputes:
Focus on repeat business to ensure prompt payment
Carry out credit checks on new clients and supply chain partners
Ask around – discreet enquiries often pay off
Factor in additional costs and renegotiate early.

Eque2 provide solutions that are tailored to the construction and contracting industry and can help support company growth with highly configurable, reliable and scalable software solutions.

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